(a) Explain the main causes of inequality in income distribution in India and examine how it affects welfare of the society. (20…

Income inequality in India stems from deeply entrenched structural, institutional, and technological factors that systematically skew income distribution.

Causes of Income Inequality and Welfare Impacts

Colonial land revenue systems entrenched skewed land ownership patterns, leaving a vast class of landless agricultural laborers. Caste-based occupational segregation historically restricted marginalized groups to low-income, informal labor, a divide perpetuated today by unequal access to quality education and healthcare. Geographically, uneven industrial and infrastructure investment has widened regional disparities between peninsular and hinterland states. Structurally, the dominance of the informal sector (employing over 80% of the workforce) depresses real wages and deprives workers of social security. Furthermore, modern technological change favors skilled labor, disproportionately rewarding capital and tertiary-sector professionals while stagnating unorganized, low-skilled wages.

These dynamics adversely affect societal welfare. Because lower-income deciles possess a higher marginal propensity to consume than the rich, concentrated income results in reduced aggregate demand, suppressing broader industrial expansion. Severe income deprivation translates directly into health and nutrition deficits, such as high rates of child stunting and wasting. Consequently, underfunded public endowments trap vulnerable households in intergenerational poverty traps, causing diminished social mobility. Over time, extreme disparities erode trust in public institutions, weakening social cohesion and triggering social unrest and conflict.

Trends in National Income in the Pre-Reform Era

During the pre-1991 period, India’s national income trajectory was defined by state-led industrialization and heavy planning:

India experienced a modest GDP expansion averaging around 3.5% per annum between 1950 and 1980, famously characterized as the Hindu rate of growth. Because annual population growth exceeded 2%, per capita income growth remained sluggish at roughly 1.3% per year, preventing any rapid eradication of poverty.

The sectoral composition shifted unusually: the share of agriculture in national income fell steadily from over 55% in the early 1950s to roughly 31% by 1990. However, instead of undergoing a standard industrial transition, output shifted largely toward the services sector, while agriculture continued to shoulder nearly two-thirds of the labor force. Furthermore, economic expansion faced persistent savings and investment constraints. Although domestic savings rates rose from approximately 10% of GDP in the 1950s to over 20% by the 1980s via public sector mobilization and bank nationalization, high capital-output ratios and inefficient capital allocation under the import-substitution regime constrained overall output growth.

Cotton Industry in Pre-Independence India and Its Constraints

The development of India’s modern factory sector began with the early mechanization of the cotton industry in Bombay (1854) and later in Ahmedabad. This expansion was powered by indigenous Parsi and Gujarati entrepreneurship, utilizing mercantile capital accumulated from the raw cotton and opium trade with China. The sector experienced major wartime expansion during World War I and World War II, as disruption in maritime trade checked British imports while military procurements surged. However, these phases were invariably followed by post-war decline and stagnation due to intense foreign competition, inflation, and obsolete machinery.

The growth of the indigenous cotton textile industry was systematically constrained by colonial policy:

• British tariff policy and free trade imperialism, under which revenue duties on imported goods were either eliminated or matched by countervailing excise duties on Indian cloth (such as the 1896 excise duty) to protect competition from Lancashire mills.
• The complete absence of a domestic capital goods industry, forcing Indian mill owners to import expensive plant, machinery, and spare parts from the United Kingdom.
• Colonial trade networks that prioritized raw cotton exports to Britain, frequently creating domestic supply shortages and inflating input costs for local mills.
• Discriminatory railway freight rates, which subsidized the movement of imported manufactured goods inland and raw materials to ports, while imposing higher tariffs on the internal transit of domestically produced textiles.

Addressing these historical structural imbalances requires targeted fiscal redistribution, major investments in human capital, and the creation of productive, labor-intensive manufacturing to achieve broad-based, equitable economic development.